The Federal Reserve’s stress test proposal is an encouraging step toward transparency, but further changes would help the agency more fully realize its goal of a more objective process that aligns capital charges with risk, the American Bankers Association, Bank Policy Institute and four other associations said today in a joint letter.
The Fed proposal would require it to annually disclose the model documentation and scenarios, as well as seek public comment on any material changes to the models. It would also shift the jump-off date of the stress test from Dec. 31 to Sept. 30.
The associations called the proposal “a welcome move to the transparency and public comment that the law requires.” However, they had several recommendations for how to improve it:
- Consider the stress tests in the context of the overall capital framework, including Basel III Endgame, the GSIB surcharge and reforms to the tailoring framework.
- Propose all model changes for public comment instead of only “material model changes.”
- Retain the Dec. 31 jump-off date for the stress tests to avoid increasing volatility in stress test projections and creating major operational challenges for banks.
- Firm up discretionary language and codify substantive reforms in regulatory text, including the scenario-variable guides and the timeline for the stress-testing process.
- For its models, the Fed should increase risk-sensitivity by reducing over-aggregation and expanding segmentation; avoiding internal inconsistencies and double counting; recognizing hedging effects; making efficient use of existing supervisory data; and strengthening transparency and governance around key model choices.
- The letter also recommends more granular adjustments to the models, as well as recommendations on the design of the stress test scenarios.
